China sources two-thirds of its iron ore from Australia, with this supply making up half of all iron ore consumed in China.
Iron ore prices rallied to a two-month high as robust demand from Chinese steel mills eats into stockpiles despite Australia’s big three miners shipping in supply at a record pace.
The rally in Australia’s largest export saw BHP, Rio Tinto and Fortescue Metals Group lift the local sharemarket to a nine-month high on Monday, while the Australian dollar closed in on its highs for the year.
The iron ore price climbed to $US128.83 a tonne on Friday, it’s highest level since September 14 when it was topped $US130 a tonne, as suppliers rush to keep up with demand. China’s is producing more than 90 million tonnes of steel a month.
BHP Group rose 2.5 per cent to $37.05, Rio Tinto advanced 1.5 per cent to $100.89 and Fortescue Metals Group climbed 3.9 per cent to $17.61.
“We’ve seen China’s steel demand comfortably at all-time highs for some months now,” said NAB head of commodities research Lachlan Shaw.
Chinese demand for raw materials is offsetting concerns over heightened tensions between Australia and its major trading partner that has flared up in the form of tariffs on wine and lobsters, and statements in the Chinese media.
“The Chinese economy has bounced back strongly from their pandemic and it’s leading the way for the global community,” according to Ross MacMillan, senior research analyst at Morningstar.
“That’s good news for the miners and the Australian economy.”
Australian Import Bans Show the Sharp Edge of China’s Economic Power
The unilateral restrictions are intended to demonstrate to other nations the costs of challenging China’s interests.
By Sebastian Strangio
November 05, 2020
In the same week that China’s President Xi Jinping pledged to promote “an open world economy” in a speech at an international trade expo, his government declared a raft of punitive restrictions on imports from Australia.
As my colleagues at The Diplomat have noted, China this week ordered traders to stop purchasing at least seven categories of Australian commodities: coal, barley, copper ore and concentrate, sugar, timber, wine and lobster. The government has ordered the halt to begin on November 6, with the South China Morning Post reporting that a ban on Australian wheat is likely to follow.
The reports confirmed fears that emerged last weekend, when tons of live lobsters from Australia were unexpectedly stranded at Chinese airports while waiting to be inspected by customs officials. This came shortly after Beijing imposed tariffs on Australian barley imports, and said it would block imports of timber from the state of Queensland due to pests.
The restrictions are set to deal a multibillion dollar blow to an economy that is already grappling with COVID-19-induced economic recession, its first in three decades. Iron ore, Australia’s biggest export to China, has reportedly been excluded from the import freeze.
While it is unclear if anything specific prompted the move by the Chinese government, the order is consistent with the recent deterioration in relations between Beijing and Canberra, which have roughly paralleled the souring relations between China and the United States. Chinese leaders were angered in 2018, when Australia barred the Chinese telecommunications giant Huawei from involvement in its national 5G network over national security concerns, shortly after passing an anti-foreign interference law geared mostly at fears of Chinese finagling in Australian politics.
Beijing’s move is clearly intended to make an example of Australia, a close American ally, in a way that is not possible with the U.S. itself, and to demonstrate the material costs of challenging Chinese interests.
In this sense, it strikes a discordant note with the keynote address that Chinese President Xi Jinping delivered at the third annual China International Import Expo in Shanghai on November 4. As my colleague Shannon Tiezzi noted of the speech, Xi aimed to reassure foreign firms that Beijing’s new focus on self-reliance and domestic consumption would not work to their disadvantage. On the contrary, Xi said, “Our aim is to turn the China market into a market for the world, a market shared by all, and a market accessible to all.”
After these actions against Australia, few can now doubt that this market access comes with firm political conditions attached.
After years of slow deterioration, diplomatic relations between China and Australia have taken a sharp turn for the worse. The disputes range from pressure on journalists, to spying allegations, to an investigation of Australia’s wine exports. Beijing holds most of the cards, but Australia does have one doomsday weapon at its disposal. It’s better not used.
The conflict echoes China’s widening disputes with other countries. Two journalists working for Australian Broadcasting Corp. and the Australian Financial Review newspaper fled China this week, after a third Australian working for state-run China Global Television Network was detained. For their part, Australia’s intelligence services have interviewed at least one Chinese journalist in a probe of alleged covert foreign influence of a state legislator, according to reports in Xinhua news agency and the Sydney Morning Herald.
Recent years have been a minefield of clashes over Australia’s foreign-influence laws, China’s human rights record and response to Covid-19, and even competitive swimming.
These diplomatic disagreements are spilling into the economic arena. Having slapped tariffs as high as 80.5% on Australian barley exports in May over alleged dumping, China has now started an equally improbable investigation of the wine industry. Canberra last month prevented China Mengniu Dairy Co. from buying local milk, juice and beer producer Lion from its Japanese owner Kirin Holdings Co. for reasons that aren’t really clear.
Through all this, the bedrock of their trading relationship has been surprisingly solid. China’s imports from Australia are up 75% year-to-date on the same period of 2016, the last time there was a meeting between the country’s leaders.
As we’ve written in the past, pushing the button on giant engineering and real estate projects is to China what cutting interest rates is to other countries. Private sector-dominated manufacturing and retail sectors are still reeling from the impact of the coronavirus, with fixed-asset investment down on levels that were already subdued last year. State-dominated construction and engineering sectors such as power generation and real estate are where all the growth is. Keeping the economy ticking over through 2020 is going to involve adding further to that teetering pile.
This economic machine runs on steel — and Australia has a crucial role there. Its mines provide about two-thirds of China’s iron ore imports, as well as a significant chunk of the coking coal used to turn that ore into usable metal. Were Canberra ever to attempt to turn that supply chain into a weapon in the diplomatic spat between the two countries — by imposing spurious paperwork, for instance, as Chinese customs officials applied to Australian coal last year, according to some reports— it would be aiming at the heart of Beijing’s economic management.
China’s addiction to industrial stimulus and Australia’s desire to work as its dealer are unhealthy dynamics for both economies. Still, it’s notable that their current fight has focused on agricultural and food produce, which attracts a lot of attention but ultimately counts for relatively few dollars. That’s probably because touching heavy industry would represent a doomsday weapon that would be quite as damaging to an export-dependent Australia as it is to an import-hungry China.
Amid the rapid decline of diplomatic relations between Australia and China, the ongoing strength of imports and exports should be a source of hope. Trade with a foreign country leaves you exposed and dependent upon trust, but that’s an attribute that both countries need to restore at the moment, not flee from. When the dust stirred up by the wolf warriors and trade war-mongers dies down, China and Australia — and the U.S. — have far more to gain from working together than from threatening each other.
Investing in largely untapped iron ore sources in Africa might be Beijing’s answer to diversifying import sources.
Growing Sino-Australian diplomatic and trade disputes have led to Chinese import bans on certain Australian products, but iron ore — Australia’s biggest export to China — has largely been kept out of the fray. Although China did impose new import procedures that could potentially hold up shipments, Australian iron ore exports to China have actually been rising, and a Chinese ban on Australian iron ore is generally thought of as unlikely, given China’s dependence on the world’s largest producer for this key commodity.
China sources two-thirds of its iron ore from Australia, with this supply making up half of all iron ore consumed in China. Introducing an import ban now would also hurt China’s economic recovery just as the government is directing stimulus money into construction, which will require greater output from Chinese steel manufacturers and increase demand for iron ore.
The Opportunity in Africa
The African continent has similar levels of iron ore reserves as Australia, and the majority of these remain untapped. The signs are already there: In May, major Chinese steelmakers called on their government to increase both domestic iron ore production and investment into the exploration and development of iron ore deposits in Africa. In early June, China’s state-controlled newspaper, Global Times, threatened that China was willing to curb Australian iron ore imports if it felt backed into a corner and would “pay more and spend time to seek alternatives from Brazil or Africa.”
Exploitation has so far proved challenging. Risky operating environments characterized by a lack of energy and transport infrastructure and unstable political and economic conditions have thwarted Chinese ambitions in the past.
It seems clear that this particular aspect of the Sino-Australian trade dispute is working in Africa’s favor. China is not just rhetorically leveraging its Africa relations to put pressure on Australia. China has options in Africa, and even if newly tapped African iron ore deposits take several years and massive injections of capital to develop, this will not deter China, who knows how to play the long game. Just as Australian exports to China benefitted from the China-U.S. trade war, African countries would do well to seize the opportunity.